Monday, March 21, 2016

Chipotle's food safety issues make for a great case study. The company has finally hired a food safety expert (should have learned this from the Jack-in-the-Box E. coli Outbreak). Additionally, they are backing off on some of the corrective actions they stated they were going to implement. Some were probably not really needed or may have had too much impact on the quality of the product. But that is what happens when poop-hits-the-fan and a whole host of consultants are brought in to fix the situation.

Chipotle has tapped Kansas State University meat-science professor James Marsden, a renowned food safety expert, to oversee food safety across the 2,000-unit chain, according to people familiar with the matter. Previously, a number of officials looked after food safety in the company's supply chain and stores, these people said.

The appointment comes as the company is struggling to recover from steep sales and share-price declines that followed its E. coli outbreak, as well as earlier salmonella cases and outbreaks of norovirus. The outbreaks sickened hundreds. Steve Ells, Chipotle's co-chief executive, now is tasked with delivering on a promise he made to consumers that new food-safety procedures would make Chipotle the "safest restaurant to eat at" and bring outbreak risks to "near zero."

Mr. Marsden has been a member of the Kansas State University faculty since 1994. He has conducted research on the safety of meat products, including the control of the dangerous E. coli O157 strain in raw ground beef. He has wrote numerous publications and book chapters on food safety. In 2014, he was inducted into the Meat Industry Hall of Fame, an annual honor bestowed by leaders in the meat industry. He's also the father of actor James Marsden.

Chipotle on Wednesday is scheduled to address investors at a Bank of America investor conference and is expected to provide an update on its first-quarter and February same-store sales. Analysts are expecting Chipotle to report a 23% decline in February same-store sales and a 26% decline in first-quarter same-store sales, according to Consensus Metrix.

Last week, the company said part of Chipotle executives' future compensation will be directly tied to the company's share-price performance.

Chipotle Mexican Grill Inc. is considering stepping back from some of the food-safety changes it touted just a month ago in the wake of a series of disease outbreaks, according to people familiar with the matter.

Last month, Denver-based Chipotle said it was conducting high-resolution DNA-based testing of many ingredients. Now, the company is considering dialing back or eliminating pathogen testing on some ingredients, according to people familiar with the matter.

The company is now having its beef cooked before it arrives at some restaurants in vacuum-sealed bags, where it is then marinated and heated on a grill before being served, according to the people.

Pre-cooking beef could help ensure that E.coli is killed, if such contamination occurs again. Chipotle previously cited high-resolution testing as a key component of its food safety program.

The use of fresh ingredients has been a point of differentiation for Chipotle, which has been competing with a cadre of new entrants in the fast-casual space, as well as with fast-food chains that are increasingly turning to fresh ingredients.

Chipotle, which had prided itself on its from-scratch cooking techniques, now risks turning off some customers.

"On the one hand, they have clearly created an image of fresh, natural, cooked-on-premise food, and that's pretty well cemented in consumers' minds. But I think the fact that they use natural and sustainable ingredients is more of a driver of their business than them actually cooking it in store," said Bob Goldin, vice chairman of restaurant consulting firm Technomic Inc. "But if people taste the difference, that will be a problem."

Chipotle said Tuesday that sales have "started to recover," noting that weekly comparable restaurant sales fell 21.5 percent during the first week of March. But for the first quarter, Chipotle said it expects to report a loss of $1 a share, compared with a year-earlier profit of $3.88 a share.

According to FactSet data, the company hasn't posted a loss in any quarter since it went public in January 2006.

Chipotle and federal investigators differed over what likely caused the outbreak. Chipotle suspected the source of the E. coli was beef imported from Australia, which it thought spread to other ingredients through cross-contamination, according to people familiar with the matter.

Federal authorities, who had leaned toward produce as the likely cause, said cross-contamination was unlikely and that Chipotle's distribution records didn't establish a link between Australian beef and the restaurants where people reported becoming ill.

Chipotle didn't drop the Australian beef supplier but said it was testing meat for pathogens before the meat arrived at restaurants, people familiar with the matter said.

Chipotle spokesman Chris Arnold in January said that restaurants used to transfer arriving raw beef and chicken to bowls and that workers would hand-rub it with adobo spices before marinating it in refrigerators and cooking it.

The company recently altered the practice so that employees would add the rub in sealed bags so as not to directly handle any raw meat.

Workers would marinate beef and chicken after restaurants closed to avoid possible contamination with food prepared during the day, the company stated on its website last month.

The company's website now only mentions that raw chicken is marinated at night, making no mention of beef.

Chipotle has also considered having its chicken arrive at restaurants pre-cooked, said a person familiar with the matter. The company's beef for barbacoa and pork for carnitas have long been cooked off-site.

Chipotle already has shifted the preparation of some produce items to a central kitchen to better ensure food safety. Co-CEO Steve Ells in December told investors that the chain had begun dicing, sanitizing and hermetically sealing tomatoes and lettuce in a central kitchen.

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